Power in the Marketplace

By HANK KALET

Special to the Progressive Populist

New Jersey has become the latest state to embark on the newest of national
experiments -- energy deregulation.

Starting in the fall of 1998, the state's consumers will be able to shop
for electricity, ending an 80-year monopoly and doing for electric customers
what the breakup of Ma Bell did for phone customers: Lower some rates, force
others upward and generally change the way we think of our utility bills.

New Jersey's deregulation plan, approved in April, calls for all 3.3 million
of the state's electric customers to have full access to competitive electric
markets by 2001; for electric rates to be "unbundled" or separated
into itemized categories so that customers can compare prices for power
generation, and know how much they are paying for transmission, local distribution,
universal service for low-income users and transition fees to pay off nuclear
power plants; and for creation of a "power pool" that will allow
competitors other than the major utilities to sell power in the state.

Proponents of the deregulation plan, including the administration of Gov.
Christie Whitman, say it will reduce energy rates by up to 10 percent while
leading to more services and products for customers.

Critics of the plan, however, say the 10 percent rate reduction being promised
is not enough, that New Jersey rates should be cut by as much as 25 percent
before the deregulation plan is put in place and that the state's utility
companies -- Public Service Electric and Gas, GPU Energy and Atlantic City
Electric -- and not ratepayers should be forced to shoulder the costs of
paying off failing nuclear plants.

Critics also say it could result in more air pollution as cheaper, coal-generated
electricity enters the New Jersey market and that urban consumers will literally
be left out in the cold as suppliers opt to serve only the more affluent
areas of the state.

New Jersey is the latest in a long line of states to begin deregulating
energy. California, New Hampshire, Texas, Minnesota, Massachusetts and others
have moved in various ways to introduce competition into the energy market,
ending the historic reliance on limited, state-supervised monopolies.

It's a direction in which Congress wants to see the electric industry move.
Several bills have been proposed that would drastically reorganize the way
in which Americans buy electricity, mandating competition nationwide by
removing restrictions on selling locally produced energy in other states.

"The future is here, and the future is competition," Elizabeth
Moler, chairwoman of the Federal Energy Regulatory Commission, told Time
magazine in March.

The deregulation push began in 1978, when Congress passed the Public Utility
Regulatory Policies Act. That legislation allowed smaller entrepreneurs
to experiment with cheaper, and sometimes cleaner, ways to produce electricity.

For a while, that led to a wave of "green" sources, such as wind
and solar power, but as incentives provided by state and federal governments
disappeared, the green power movement waned.

That left cogeneration, which allows manufacturers to trap and reuse the
heat typical power plants let go to waste, as the most popular of the alternate
sources. Over the last two decades, more and more companies, finding cogeneration
cheaper, have been abandoning the larger utilities and producing electricity
on site.

In 1992, Congress passed the Energy Policy Act, which allowed smaller energy
producers and non-local utilities to ship their electricity along power
lines owned by local utility companies in the same state. The process, called
"wheeling," is the centerpiece of the deregulation movement, because
it effectively ends the monopoly status enjoyed by the major utility companies
by allowing the cogeneration plants and other electricity producers to compete
directly for customers.

U.S. Rep. Tom Bliley Jr. (R-Va.), chairman of the House Commerce Committee,
which will be reviewing the deregulation legislation, is claiming that consumers'
electric bills will be drastically reduced once market forces take over.

"Breaking up the last monopoly and giving consumers the power to choose
will cut the average family's electric bill by between 15 percent to 43
percent, and customers will get better service and reliability, but with
accountability," he told the Gannett News service earlier this year.

Indeed, customers who have participated in pilot programs allowing them
some level of choice have seen some savings. But it is unclear whether the
savings were a result of competition or other factors.

Residents in Peterborough, NH, for instance, participated in a pilot program
and saw their bills shrink by about 15 percent. But, as the Washington
Post pointed out in an April 6 Outlook piece, half the savings were
"due to a state-mandated subsidy designed to ensure that people would
participate in the pilot. Much of the remaining savings were due to marketers
shaving profit margins extra-thin in order to establish their credibility
in the market." That could mean that, once the new players are firmly
established in the New Hampshire market, customers will see their rates
inch upward, ultimately negating the earlier savings.

Tom Getz, executive director of the New Hampshire Public Utilities Commission,
told the Post: "You have to be careful in trying to apply the
result here directly to what would happen with full restructuring and what
would happen elsewhere. It's just too early to quantify those benefits."

In New Jersey, where rates are between 27 percent and 50 percent above the
national average, critics say the promised 10 percent rate cut falls short
of the goals the state should be setting. The New Jersey Business and Industry
Association has said the plan would be a disappointment unless rates drop
by between 15 and 20 percent, and New Jersey Citizen Action, a coalition
of labor, church and community groups, is calling for a 25 percent rate
cut.

The state should force the companies to lower rates before deregulation
begins so that utility firms are working on a lower rate base when the restructuring
kicks in, otherwise power firms will have little incentive to bring rates
down, Citizen Action says.

"What if we deregulate and we don't get lower rates?" says Stacy
Berger, energy organizer for Citizen Action. "There needs to be a mechanism
to get those lower rates.

"Deregulation has not necessarily brought lower rates elsewhere. It
has brought competition so that if one utility drops its rates, then everyone
else drops, and vice versa. It's more stable. We're being asked to let the
free hand of capitalism do its thing without any guarantees."

Citizen Action has called the New Jersey plan a bail out for utility companies,
because it allows them to recoup all of the "stranded costs" associated
with bad investments in nuclear energy and power-purchase agreements made
while the market was still regulated. The state Board of Public Utilities
estimates that "stranded costs" will total between $7.1 billion
and $16.8 billion, depending on future market prices for electricity.

In the past, the government allowed "stranded costs" to be passed
on to ratepayers, because there was a "a regulatory compact requiring
(utilities) to have a regular stable source of energy in exchange for a
guaranteed 12 percent profit," says Citizen Action Chairman Vic DeLuca.
But to continue this in a competitive market amounts to a state subsidy
for the major electric utilities, he says.

"If they want there to be a free market, then they should take their
lumps," he says.

But the BPU sees the issue differently. It says that the utility companies
took those risks in a controlled market place and that PSE&G, GPU and
Atlantic should not be penalized because of the impending restructuring.
The state is proposing that utilities not be guaranteed full recovery of
their stranded costs, and that the issue be addressed on a utility by utility
basis.

The state is considering allowing the sale of utility bonds that would be
paid for by ratepayers through a special "wires charge" on their
bill, a plan that has been criticized elsewhere as a utility industry bailout.

A better solution, says DeLuca, would be to give ratepayers a small amount
of stock in exchange for paying off the debt. This way, ratepayers would
become partners with the utility companies and receive dividends, rather
than just subsidizing a for-profit venture.

"If I have to pay for the debt, I should get something for it,"
DeLuca says.

Another major concern is the effect that deregulation will have on the environment.
The push for lower cost energy could lead to an increased reliance on cheap
electricity from dirty -- generally coal-fired -- power plants in New Jersey
and the Midwest, says the Renewable, Efficient, Affordable, Lasting Energy
coalition. It says the more customers the coal plants attract, the more
sulfur and other pollutants will be emitted into the air.

"The electric industry is the single largest industrial source of air
pollution which jeopardizes the health of millions of New Jersey citizens,"
Rebecca Stanfield of the New Jersey Public Interest Research Group said
at a February press conference. according to the Star-Ledger. "Any
plan to restructure that industry must as its top priority, address this
severe public health problem."

The coalition says past loopholes in federal clean air statutes have allowed
older, primarily Midwestern electric plants to operate under less rigorous
emission standards, allowing them to generate cheaper electricity. In a
competitive market emphasizing low rates, dirtier plants have an advantage,
the coalition says.

Strong national air quality standards need to be set and all plants brought
in line before the industry is fully deregulated, the coalition says.

BPU's Tate told the Star-Ledger, however, that the state has been
tightening its environmental controls on utilities and that it is pressing
for regional air quality controls that would force the dirtier Midwestern
plants to clean up their act.

"We've been at the vanguard in calling for the strongest emission standards
possible," he said.

Environmentalists, however, are concerned that the state will move ahead
with industry restructuring regardless of whether new clean air standards
are set.

The reason: The state master plan places lower rates above all other considerations,
says Madelyn Hoffman, executive director of the Grass Roots Environmental
Organization and the Green Party's candidate for governor. An earlier draft
of the plan, developed under then-Gov. Jim Florio, ranked energy efficiency
and conservation and the use of renewable forms as important components
of a potential restructuring, making the construction of new energy plants
unnecessary until at least 2001, she says.

But under Gov. Whitman, several new plants have received permits, and the
"green" component has been removed from the master plan, she says.

"There is no hierarchy left in the plan, so there is no overall philosophy
concerning renewable sources," she says. "What are we going to
promote and not promote? It seems that the only concern is prices.

"But our concern is that if a philosophy is not incorporated we will
end up losing sight of all that and we could end up with several unnecessary
power plants and unnecessary pollution being emitted."

Then there is the question of universal access -- especially for electric
customers who live in the state's poorest areas. The restructuring plan
calls for existing utilities to function as providers of last resort for
customers unable to buy power elsewhere, at least during the period when
the BPU expects rates to fall.

But urban politicians and consumer advocates are concerned that, despite
language that prohibits "redlining," poorer consumers could find
themselves on the outside looking in, with residents of cities such as Newark
and Jersey City or poor rural areas in Cumberland County unable to benefit
from competitive pricing.

"Customers can choose suppliers, but more critical in my mind is the
fact that suppliers will be able to choose customers," Trenton Mayor
Douglas Palmer told the BPU during a February hearing (Times of Trenton).

He asked the BPU to guarantee that residents of poorer cities like Trenton
"will have the same supplier options" as customers who live in
more affluent suburbs like Hopewell, Cherry Hill and Glen Ridge.

When all is said and done, consumers may have little say as to what happens
to the soon-to-be-deregulated industry. Lobbyists for the utilities, the
cogeneration plants and the business community have been descending upon
Washington and the various state capitals in an effort to influence deregulation's
outcome. According to the American Local
Power Project, a national network that provides information on deregulation
to local communities, "many events indicate that the electric industry
is dominating the political agenda to shape competitive markets to their
advantage."

"Big business is driving the debate and too many consumers are either
ignorant of the issues or ill-prepared," consumer advocate Jim Conran
told a meeting of New Hampshire consumer and community action groups in
New Hampshire last year.

"The jury is still out on whether deregulation saves consumers money.
And once the industry is taken apart, it's hard to put back together again."

Hank Kalet is news editor for the Princeton Packet's Middlesex
County newspapers.